The Color of Oil

August 05, 2009

Ken Silverstein, EnergyBiz Insider
Editor-in-Chief

Big Oil's reluctance to invest more of its vast resources into the green space is a function of its vision. It is seeking to meet global oil demand while at the same time protecting its shareholders by focusing on the development of fossil fuels.

Any evolution in that thinking will only occur if there is a fundamental change in global carbon policies and particularly those of the United States. Even though the Obama administration is aggressively pushing for greater fuel diversity, the oil industry is sticking closely to its core competencies and in some cases, reducing its investment in wind and solar power.

"Hydrocarbons are the most plentiful and economic forms of energy that we have," says David O'Reilly, chief executive of Chevron, at an industry conference. "And the fact is, even if the use of renewable sources doubles or triples over the next 24 years, we will still depend on fossil fuels for more than 80 percent of global energy demand."

The U.S. Department of Energy projects global oil demand to rise to 118 million barrels a day by 2030. That's compared to the roughly 85 million barrels demanded today by consumers. The oil giants allocate 5 percent or so of their capital budgets on exploration. A tiny fraction of those resources, by contrast, is spent on developing green energy.

Shell Oil Co., for example, has allocated capital to wind and solar but has recently sold off some projects. BP, meanwhile, is cutting back. According to the American Council on Renewable Energy the oil industry has invested about 10 percent of what the venture capital community has in renewable energy since 1995. That equates to about $5 billion of the $50 billion invested by risk takers.

None of this suggests that the oil sector is totally disinterested. ExxonMobil and Chevron have also made notable investments in green technologies. But some critics maintain that their approach is calculated and has more to do with the very real possibility that U.S. lawmakers will require mandatory greenhouse gas emission cuts.

The goal is to motivate companies with the resources to diversify their energy portfolios. Ultimately, the nation must be able to meet its future energy through an amalgam of sources. While oil and natural gas will remain integral, alternative fuels and energy conservation will have a place at the table.

If the goal of corporate boards is to protect the interest of shareholders, then it would be appropriate to ask those officers whether they should diversify away from oil. It's a heated topic, with some saying that they are energy companies that must get ahead of the trends and be prepared for the future. Others, though, are saying that their strategies mirror current realities and that petroleum will remain the dominant fuel source for transportation well into the future.

Lofty Goals

ExxonMobil, for example, has shelled out about $30 billion developing new oil and gas resources since about 2003. Last year, it spent slightly more buying back its shares, all to help increase the value of the company's outstanding stock. Its board clearly states that fossil fuels provide the company more bang for the buck. Its management, however, is investing in alternative fuels that include a $600 million partnership to develop algae-based bio-fuels.

While that figure represents a small percentage of its overall capital budget, champions of the alternative transportation fuel cause say that it is still more than what the federal government devotes to algae research. Many Democrats and environmental organizations counter that the ExxonMobil's profits have been "absurd" and argue that some of its tax benefits should be reallocated to developers of green energy.

Republicans generally oppose such changes, saying that the demand for energy is rising and that the country needs to do more to encourage oil and gas development. Any tax hike, they add, would deter production, diminish supply and thereby increase prices to consumers. Many Democrats point out that the oil industry recently earned $123 billion in profits and it does not need incentives to drill.

The Democrats control both chambers of Congress as well as the White House. If their leadership is able to unite its party, it can literally mandate a paradigm shift -- one that that tries to minimize the nation's carbon footprint by penalizing the fossil fuel sector.

They want to build upon the current foundation. Clean tech industries are now making a strong contribution to the American economy, providing 116,000 jobs and $19 billion in investment in recent times. The U.S. wind industry, for example, expanded by 45 percent in 2007 and contributed about 30 percent of new power generating capacity last year.

"Instead of giving oil executives another way to boost their record profits, I believe we should put in place a windfall profits tax that will help to ease the burden of higher energy costs on working families, and we should invest in the affordable, renewable sources," President Obama said on the campaign trial.

While those comments were made at time when gas prices at the pump were at $4 a gallon and he has since softened his approach, the president has nonetheless stayed true to his theme: The nation must reduce both its dependence on foreign oil as well as its current consumption levels, relying instead on alternative sources of energy to power not just the transport sector but also electric utilities.

It is a lofty goal. But the oil companies are betting for now that things won't change that much despite the party in power.